=+10.14 Policy Application: Taxing Interest on Savings: Suppose I care only about consumption this year and consumption next year, and suppose I earn an income this year but do not expect to earn an income next year.

A. The government announces an increase in the tax on interest income. Illustrate my before- and aftertax intertemporal budget constraint.

a. Suppose I save 50% of my income after the new tax is imposed. Illustrate the amount of the tax the government will collect from me next year. Call this T.

b. Illustrate the most I would be willing to pay next year to keep the government from imposing this tax on interest income. Call this amount L.

c. Is L larger or smaller than T? What does your answer depend on?